In self-assessment, your annual return is checked to see how much income you have received in a particular year and, based on that figure, how much tax you owe.
Most people are keen to keep their tax bills as low as possible, and this can be done by minimising the amount of taxable income you earn.
That doesn’t mean asking for a pay cut if you’re an employee, or reducing the rent you charge if you’re a landlord: you can reduce taxable income without making yourself worse off by, for example, sharing your income with your spouse, or by deducting certain expenses from your earnings.
Here are five of the most common ways of cutting your tax bill:
1. Making pension contributions
Any money you save into a pension is not liable for income tax.
If you’re a basic-rate taxpayer (at 20%), this means that for every £80 of your post-tax income you put into a pension, you are credited with £100. But higher-rate taxpayers (at 40%) can claim back a further £20 through their tax returns.
Dispelling pension myths
2. Offsetting expenses
If you are self-employed or run a company as a sideline, any legitimate expenses you incur in operating your business can be offset against your income.
For example, if you earn £20,000 in sales but spend £1,000 on computer equipment used solely for work, you will only be taxed on £19,000.
Does tax self assessment affect you?
3. Deducting mortgage interest
If you own buy-to-let property, you can deduct the cost of mortgage interest from the rent you receive when calculating your income tax bill. Starting in April 2017, however, the system is being changed so that landlords who are higher-rate taxpayers cannot claim relief at the full 40%: the maximum will be limited to 20%.
Landlords can also claim expenses relating to the running of their property, such as letting agents’ fees.
How do buy-to-let mortgages work?
4. Sharing interest
Married couples and civil partners can divide any savings income in a tax-efficient way if they wish: so if one spouse is a higher-rate taxpayer, they can “divert” their interest to their other half so that the interest is taxed at 20% or 0%, for example, rather than 40%.
Five things you might need to pay tax on
5. Delay taking pension income
New rules mean that it is now much easier to take cash out of a pension – but much of this money could be liable to income tax. If you take a large pension lump sum as soon as you retire, it could push your annual earnings – on top of any salary payments that you got while still in work – into a higher tax bracket.
If you can stagger the withdrawals or simply wait until the new tax year has begun, you could end up paying much less tax.
Self assessment tax myths dispelled
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